Playing the Green Mountain Bounce with Weekly Options

Shooting for short-term profits in the beleaguered coffee name

My favorite week of the month is options expiration week – the third week of the month. This week, the universe of slightly more than 100 weekly option choices expands to 5,000 or so choices as expiration is just a couple of days away.

I typically make my weekly options trades midday on Wednesday and I do the same for expiring monthlies. The two-and-a-half day exposure is just about right given the cash returns I get from selling weeklies (typically puts).

Expiration Friday also gives me a chance to sell puts with huge premiums on “hot stocks” that are in the news and are only of interest for a two-and-a-half day trade. One of these hot stocks currently catching my eye is Green Mountain Coffee Roasters (NASDAQ:GMCR).

Being in the news and bouncing can mean huge premiums when selling puts. The GMCR stock price is at $51.34 and you can trade the March Week-3, 50-strike puts selling for 67 cents per contract, or a potential return of 1.3% in two-and-a-half days. The charts say money flows in around $50. This translates into an incredible short-term cash generating position with a potential annual return of 69%.

But there is something even more attractive about GMCR puts. They are available at strike prices that decrease by a dollar at $50 and below.

If you do not want to risk being put the stock, you can write puts as low as $45 and still make a terrific profit. You can sell a GMCR March Week -3 48-strike and get 29 cents, or $29 a contract. This put expires on Friday after the close.

That is a 0.60% return (31.5% on an annual basis), and the biggest risk with this trade is that you would have to roll the position to a new strike or month if the stock drops another 10% before Friday. And I sense the crash in the stock is over for now.

Remember, this is a trade to generate income or cash at very low risk — I am NOT recommending the stock. If I did anything with the stock I would make it a long-term short position. That is the beauty of selling weekly options – you can make money, serious money, with little or no capital risk, with just two-and-a-half days of exposure to the market.